This blog has been created to pen down my thoughts on value-based investment opportunities (or the lack of them) in Indian listed companies. As an enthusiastic reader and life-long student of Behavioural Finance, i also plan to blog on various aspects of investment psychology.

Friday, July 30, 2010

If one looks hard enough, one can see 'investing' all around. One can learn something or the other about investing from virtually all aspects of life.
A good investor needs to possess some qualities. A lot of these are 'in-built', others can be learnt.
In this post, an effort has been made to compare certain qualities of a good investor with those possessed by various members of the animal kingdom!! (If you think I am going bonkers, I wouldn't blame you! But still, do read on.)

Please note that:

All investors may not possess all the qualities mentioned and honestly, its not necessary too.

What is most important is that the investor displays the right quality at the right time. (not all the time)

Some of the qualities mentioned are mutually exclusive.

Please don't take everything in this post 'literally'.

Sloth - Inactivity

The first one on our list is the Sloth. This tropical rain-forest mammal is an amazing creature. It moves at a top speed of 0.15 mph! 'Sloth' also happens to be one of the seven deadly sins, denoting extreme apathy and inactivity.

In today's 'investing' world, where one is constantly pounded with information, where the need to do something all the time is all-pervasive, where inactivity is unheard of, investors can surely take a cue from the good old Sloth. A lot of times, the best thing to do is to do nothing at all!

As Warren Buffett quotes "Lethargy, bordering on sloth, should remain the cornerstone of an investment style."

Of course, one should not be a sloth all the time. Inactivity is most called for when one can see frenzied activity all around. In short, be a Sloth selectively. :-)

Honey Badger - Fearlessness

Just a few months ago, the indices were at record lows. Valuations in a lot of companies were tempting, to say the least. There were even some well established companies with market cap less than cash on books! But how many of us bought big? Very few. Why? Afraid that the overall stock prices will tank further?

Well in that case, one can learn a lot from this mean little guy, the Honey Badger. The Honey Badger has been entered in the Guinness Book of World Record as being the world's most fearless animal. About the size of a house-cat, a Honey Badger in a bad mood will attack almost anything that moves. One can find youtube videos of Honey Badgers attacking leopards and lions!

Again, if done inappropriately, this attitude is plain stupid. But one should certainly be fearless specially at times when everyone around is afraid.

Mama Turtle - Emotional Detachment

The female turtle is probably one of the most emotionally detached dudette ever. She comes ashore, lays its eggs and just leaves. She neither cares for the eggs nor for the new-born. They are left to fend for themselves!!

Now i agree this is totally extreme! The only thing we should take from this is emotional detachment.. in this case, towards stocks, not children! A lot of times, for a variety of illogical reasons, investors become emotionally attached to stocks and don't sell them even at ridiculous valuations. Other way round, investors don't buy 'sitters' due to certain mind-blocks or biases. (happens with me too) Emotions often cloud logic and reason. One should not be emotional while investing. So, while emotions may play the central part in other walks of life, in investing, the lesser their involvement, the better.

House Lizard - Cut Your Loss!

The common house-lizard (chipkali) will cause most of the female readers to scream with disgust. But there is something to be learnt from this velvety creature too. :-) When faced with danger, the lizard detaches its tail, which keeps on wriggling on its own. As the predator gets distracted by the wriggling tail, the tail-less lizard makes good its escape. Better to lose a tail, than to lose its life, right? The tail will grow back.
In investing too, sometimes, we need to lose our tail. (not literally of course!). E.g. When we realise that buying a particular stock was a wrong decision and its now quoting at a small loss, we should sell it off immediately without waiting for it to come 'cost-to-cost'. A small loss due to an incorrect decision is perfectly acceptable than losing a big chunk and peace of mind.

Hyena - Opportunistic

This rather repulsive looking creature is a super opportunist! Hyenas are opportunistic feeders and have a keen sense of judgement and risk. They typically trail the bigger cats and feed off the leftovers of their kill.
Similarly, in investing, one should be on the prowl for opportunities where the risk-reward ratio is in one's favour. Special situations (mergers, demergers, acquisitions, takeovers, slump-sale, etc), rights issues and warrants are prime opportunities available for opportunistic investors and decent money can be intelligently made in them. One needs to keep one's eyes and ears open for such opportunities always.

Cat - Curiosity

"Curiosity killed the cat"..so goes an idiom. Well, we aren't planning to do any killing here, don't worry. Cats, by nature are extremely curious. You can play with a cat for hours and it will still want more. They like to explore, try new stuff and often get into trouble.
I believe that an investor also should be just as curious. Curious with regard to companies, their products, the nitty-gritties involved. Curious with regard to learning new stuff, appreciating new techniques and always wanting more. The day one's curiosity ends is the day learning stops. And in investing, one should continue to learn all the time. So a big MEOW to all..

Sheep - Humility

I also do not know why, but sheep look so very humble, don't they? Well, at least to me, they do! (dunno if they are really so) The stock market is a place where humility is rare. People often claim to be far more than they are or something they are not! Successes are trumpeted and failures are quietly swept under the carpet. A lot of people think they are the best, much better than everyone else! In such scenario, a healthy dose of humility is an absolute must. One should never think of oneself as the greatest investor on planet earth. The market shows such people their rightful place soon enough.

Crab Spider - Patience

This cute looking fella is the Crab Spider. The most curious feature of the Crab Spider is that it does not weave webs. It does not go hunting after insects too. It sits still patiently, allowing the prey to come within striking range. It can sit still for long periods of time waiting patiently for the next yummy meal.
Now thats patience. Waiting and waiting for the right opportunity to come by. Today, patience is totally lacking in the overall investment community. The definition of 'long term' has become very flexible. In such a scenario, one cannot help but admire the Spider Crab! :-)

Black Panther - Solitude

This fabulous looking creature, the black panther (leopard) lives alone its entire adult life, except during mating. (Hmmmm)
Anyways, relating this to investing, as my good friend Dnyanesh says 'investing is a lonely profession'. I completely agree (although loneliness and solitude are vastly different concepts). As individuals, we are different in all respects. Our investment ideas and processes are equally different. Our decisions are also, in a way, unique. Getting together in groups and discussing investments will only lead to confirmatory biases taking over. Buffett has also strongly advocated the limited use of committee-style investing for getting extra-ordinary returns. Taking cue from the black panther, one should 'hunt' alone. (Also, the idea of the lone hunter/lone ranger sounds so Hollywoodishly cool!)

Dolphin - Have Fun

Dolphins are synonymous with fun. Have you ever seen a sad dolphin?! Even when they are working (a.k.a hunting), they jump around and seem to have a good time.
Similarly, if one is not having fun in one's work, that work is not worth doing, imho. Investing is tremendous fun. (at least I think so) So enjoy, have a good time and make good money. If your investing activity is synonymous with ulcers, blood pressure, tension and sleepless nights, believe me, its just not worth it. Having fun will make you a better investor and a better human. :-)

Well, there you have it. Some of the key qualities of good investors that one can observe in nature. (I am not at all claiming that the above list is exhaustive).
I love to co-relate multiple disciplines and different streams of study and knowledge with investing. It gives one a fresh approach and perspective. If you also liked what you just read (hope you are still awake), then do read this book. Its mind-blowing and a trillion times better than what you just read.
Would love to hear your comments..

Monday, July 26, 2010

"A man who does not read good books has no advantage over the man who cant read!" So says Mark Twain.. And it is so very true. There is a world of knowledge out there. And its yours if you choose to.
Personally, I love to read. Due to time limitations, I read books about investing and psychology only. These books have taught me a lot. They have awed me, humbled me and I have communicated with the greatest minds on earth through these books! Here is a list of good books you also can read and learn from. For simplicity sake, I have categorized them based on various criteria. The order in which the books are mentioned has no significance whatsoever.

The Buffett/Graham/Munger category:

1) Security Analysis - Graham & Dodd
The original text of value investing, first published in 1934. The book is currently in its sixth edition and it is still on the best-sellers list. It is proof that investing is indeed timeless. The book is extremely technical in nature. Readers who are not serious will find it daunting. (To be frank, boring!)

2) The Intelligent Investor - Graham
The follow-up to the Security Analysis book, The Intelligent Investor is yet another classic. Much more simplistically written, I believe it is a must-read for any budding investor.

3) Buffettology/The New Buffettology - Mary Buffett
An excellent book to read about Warren Buffett. Written in simple language.

4) The Snowball - Alice Schroeder
Size-wise, this is the biggest book on Buffett! :-) Personally, it was not big on value addition, for me. After reading this book, one's respect for Buffett as a human being and family man (not as an investor) would surely come down.

5) Poor Charlie's Almanack - Munger
Reading this book has been quite an experience. It takes a huge amount of mental effort to understand and absorb this book. Munger is amazingly smart, equally funny and kinda whimsical.

There are countless books written on Buffett. Be careful about choosing which one to read. Most of them contain the 'Buffett' name just to sell the book.

The Value Investing/Investing category:

1) Common Stocks & Uncommon Profits - Phil Fisher
One of the best books on investing, imho. Fisher should be called as the Father of Simplicity! Reading this book will change your whole outlook towards investing and how you look at companies.

2) Value Investing: From Graham to Buffett and beyond - Bruce Greenwald
Another amazing book. I have been fortunate enough to attend a seminar by Prof. Greenwald and hear him talk. It was a great experience. Definitely a book worth reading.

3) Value Investing - James Montier
For me, Montier is a rockstar! He is one of the world's leading authorities on Behavioural Finance, a subject close to my heart. Montier's work on value investing is also very much worth reading.

4) The Little Book of Value Investing - Christopher Browne
An amazing book. Simplifies the 'investing in a business' approach to a great extent.

5) The Focus Investor - Rockwood
Though not strictly a book on value investing, this book provides an altogether different approach to investing by combining varied investing philosophies. Surely worth reading.

6) The Dhando Investor - Pabrai
For me, this is a coffee table kinda book. Imho, the book is over-rated.

7) Margin of Safety - Klarman
This has to be on your must-read list. An amazingly written book on the concept of margin of safety, which is central to the value investing philosophy.

8) One up on Wall Street - Peter Lynch
9) Beating the Street - Peter Lynch
Both are good books by a very street-smart investor. Lynch was not at all in the value-investing camp, but he earned phenomenal returns (the best ever) as a mutual fund manager.

10) Reminiscences of a Stock Operator - Edwin Leferve
This is not a book on investing as such, its written by a hard-core trader. But its an amazing and wonderful read. One can learn a great deal about the psychology of the markets from this book.

11) Its when you sell that counts - Cassidy
One of the very few books written on the art of selling! Contains a lot of stuff on behavioural finance too.

The Behavioural Finance/Psychology category

1) Predictably Irrational - Dan Ariely
A superb book for anyone interested in psychology. Full of examples and experiments.

2) Where are the Customers' Yachts - Fred Schwed
Another excellent and entertaining take on how Wall Street operates. A must-read.

3) Fooled by Randomness - Taleb
4) The Black Swan - Taleb
Taleb's books take time to understand and digest. But are very absorbing. These two books always help me remain within my aukaad! :-)

5) Damn Right - Janet Lowe
This shouldn't really be in the entertaining category, but I personally found it amazingly entertaining. Anyways, anything on Munger has to be witty and entertaining! Do take a look.

These are few of the books I have read and I would recommend that you also take them up. It would be a life-altering experience. I am in the process of reading more books and would update any good books I come across.. Currently, after going through a Montier phase, I am taking up The Art of Strategy which was sent by my good friend Carlos. Btw, Carlos, if you are reading this, I expect a huge number of comments (a.k.a. brickbats) from you, since 'books' is a matter close to your heart. :-)

Cheers and happy reading!!

P.S. I do not have a soft copy of any of the books, so kindly do not ask me to email soft copies n stuff..

Tuesday, July 6, 2010

One of the more popular 'theme' in the 'theme-based-investing' categories is investing in Holding Companies.
For the un-initiated, let me first explain in brief what this theme is all about...

There are some listed companies, whose main 'business' is to own and hold equity shares of other companies, most of which are listed group companies, run by the same management.

Basically, instead of the individual promoters owning shares of all their group companies, all these holdings are held in a single company. This is called as the 'holding company'. (May or may not be a 'holding company' from accounting point of view.)

E.g. Bajaj Holdings and Investments Ltd. is the holding company of the Bajaj Group. It holds 31% stake in Bajaj Auto, 35% stake in Bajaj Finserv and 24% stake in Maharashtra Scooters, among its other investments.

So what is the 'accepted' logic for going about investing in such companies? Well, it goes like this...

Such companies hold shares of other listed companies. The market value of these investments (since they are also listed) will normally be higher than the value of investments shown in the books of the holding company.

In many cases, the market value of the holding company's investments (net of debt) is much higher then even its own market-cap.

So, investors argue that the holding company is undervalued, since it has 'assets' whose market value is greater than its own market-cap.

If one were to buy NSIL at current market-cap of Rs.500 cr, one would get investments worth Rs.2200 cr. Seems like 'buying a dollar for fifty cents' huh?

This, precisely, is the investment argument that the believers in this theme of investing put forth. Further, while calculating the 'fair value' of the holding company, investors in general 'give' a discount to the market value of its investments. (The usual norm in the market is to accord a 50%-60% discount.) Thereby, fair value of NSIL should be about Rs.1300 cr (60% of market value of investments). Hence, at the present market-cap of Rs.500 cr, NSIL is a 'screaming buy'.

Now, while this logic seems reasonable, let me ruin your day by putting forth my thoughts on the same...

Strategic stake v/s financial stake: There are some investments which are financial in nature (to be sold later, preferably at a profit and make money.) There are other investments which are strategic in nature (never meant to be sold, but are meant to be held on and on, as part of some strategy.) Holding companies are created from the strategy point of view and their investments are necessarily strategic in nature. Holding companies stake in other group companies is in the nature of the 'promoter holding'. If this stake is sold, the group will lose control of the company. (In effect, it will never be sold)

Does market value matter??? Sooo, since the investments made by holding companies are strategic in nature, these will never be sold, but held on till eternity! So, if the market value is never going to be realised (by selling off the investments), should it matter? Should one even bother calculating the market value of the holding company's investments?

Please keep in mind that I am talking about only holding companies. If a company holds shares of an un-related listed company, the market value of these shares should be given due consideration, imho.

Well then how can these holding companies be valued?

In my view, these companies should be valued like any other business. Its revenue is the income it receives on its investments (dividend). Usually, expenses are limited and most of the revenue is reflected as the profit.

One can multiply this profit by a PE ratio accorded to a zero-growth company (e.g.Graham suggests 8.5 PE ratio) to arrive at the fair value of the holding company.

This is merely a suggestion and cannot be the only way to value a holding company. To each his own!

Further, investments other than those in group companies should be given their fair market value.

Of course, when one values holding companies like this, the resulting 'fair value' will be far farr farrrrr lower then the prevailing market cap, meaning that these companies should not be bought. Well, this happens to me all the time and till date, i have ended up buying only one holding company...

I am well aware that not everyone will agree with me. (In fact, i think most investors wont!). Valuation is an art and is very relative. The way I look at holding companies will not be the way you do!

But isn't that the beauty of investing? Well can all agree to disagree on certain fundas and still, all of us can earn money!! E.g. My good friend Ayush is a firm believer in the holding company investing theme (and I am not!) And i know it for a fact that he has earned a lot of money in this theme (and I have not!) Ayush, party-time dude!

As usual, the purpose of this post is to start off discussions on the topic. I do not claim that my views are right and others' are wrong...